In the two years since I started the PropTech Future blog, the sentiment and enthusiasm in many areas of the PropTech ecosystem has done a complete 180 degree flip. We have gone from record fundraising amounts and continued launches of innovative companies to the most challenging fundraising environment I have witnessed in my career. Skyrocketing interest rates have contributed to these challenges, and the recent collapse of Silicon Valley Bank (followed by the dumping of Signature Bank and Credit Suisse) makes it clear there is still a lot of pain to be felt.
The challenges for the real estate industry go far beyond financing issues. The macro environment is wreaking havoc on some of the largest verticals that make up the real estate industry. The home sales sector is facing significant headwinds with record-high inventory and the highest interest rates in 30 years. The office sector is also not doing any better as tenants continue to downsize their footprints to cut costs and accommodate the changes brought on by the widespread adoption of hybrid work. Additionally, the entire technology sector, which has been driving huge demand for leasing activity for at least the past decade, is facing a reckoning as tech valuations plummet. The revenue growth enjoyed by many of the pandemic’s darlings has now been reversed as people venture out of their homes. Investors have shifted from a growth-at-all-costs mindset to a profitability-driven mindset. We all knew the party couldn’t last forever, but I was definitely surprised at how quickly it all changed.
I remain optimistic about the long-term prospects of PropTech, primarily because there is still a lot of work to be done to modernize the industry. With so many companies in survival mode, I worry that the pace of innovation will slow considerably (with the exception of AI, but I’ll leave that for a future article). While a lot of great articles have been written recently by industry experts diving deep into issues like funding, returning to the office, interest rates, and inventory, there is a more pressing concern that keeps me up at night: the concern around interoperability. All of the new technologies that have emerged in recent years have not focused on making all the solutions work together harmoniously. While most companies are offering APIs and SDKs to deliver integrated services, the lack of agreed-upon industry standards in PropTech still creates a huge gap. This lack of interoperability is starting to show cracks as landlords and occupiers strive to deliver new experiences for their tenants and staff. These cracks are manifesting in many places, but I decided to focus on one that has yet to receive much attention – one that will increasingly surface in the coming months.
A fairly new category of solutions that has been attracting a lot of attention (and a lot of funding) in recent years are tenant engagement apps. I've written at length about these services before. In a nutshell, landlords and property managers deploy tenant engagement apps across their office portfolios with the goal of providing a great tenant experience to drive leasing activity and increase the likelihood of renewals (similar resident experience apps are becoming more popular in multi-family properties).
For example, tenants can use these apps to access the base building (perimeter doors, turnstiles, elevators, amenity spaces), order food, book meeting rooms, communicate with building staff and other tenants, monitor air quality, stay up to date on events happening in the building, and more. Building staff can use these apps and the data they generate to do everything from measuring ESG compliance to understanding occupancy to activating new experiences. While these platforms are relatively new, a number of highly well-funded companies are quickly gaining market share in a highly competitive environment.
While most of the target clients for tenant engagement apps are building owners and managers, some of these companies are starting to target enterprise tenants with tenant-focused solutions. Rather than deploying tenant apps across the building, this new offering targets enterprise tenants with multiple offices, bringing all employees, regardless of location, into one unified app that handles everything from access control to communications, policy and procedure documentation, and occupancy for each location. Since there are significantly more tenants than there are office buildings, this offering significantly increases the TAM for these app providers. Additionally, many enterprises prefer to deploy a single app (designed for their specific needs) to their entire employee base, rather than using different apps based on which office each employee works from. While there is a lot of efficiency, convenience, and actionable data that tenant-specific apps can provide to enterprise tenants, the lack of interoperability between the various app providers creates major headaches for all involved.
A tenant-specific app from one vendor won’t work well with a building app from another vendor. As an example, consider a law firm with 500 employees across six offices in different cities across the country. The law firm decides to deploy a dedicated tenant-specific app for all employees so that the team can access different offices, take advantage of company perks, book meeting rooms, and improve internal communication. The tenant app ties together all of the law firm’s different software offerings and enables employees to access any of the firm’s offices, communicate with team members, book meeting rooms, and submit IT support tickets. It also provides the corporate team with useful data that can inform anything from leasing/renewal strategies to measuring ESG compliance against corporate commitments. However, the six different offices are in buildings where each owner has deployed a different building-specific tenant engagement app. What happens then? In this situation, the tenant-specific app does not give employees access to the base building where they work, so they must open that specific building’s app to access it. If an employee uses the building app instead of their company’s app, no data is collected by the tenant app.
These issues are compounded as hybrid work grows in popularity. It's becoming increasingly common for employees to work from different locations each week, rather than working from one office. A typical employee schedule might look like this:
Monday – Work in the Midtown office
Tuesday – Work from home
Wednesday – Work from a flex/coworking space
Thursday – Work in the downtown office
Friday – Work from home
In a scenario like the one above, employees may need to use a company-specific app, a building app for the midtown office, a building app for the downtown building, and a booking app for the Flex provider to enter various locations. And no platform contains a complete database with all the records. Maybe tenants won't use any apps at all and will instead carry just a few access cards. If solutions that are meant to increase tenant satisfaction and efficiency end up creating friction and a difficult user experience, people will stop using any of them. Mass adoption of these apps is a key success factor. Otherwise, the data collected to activate the designed experiences will be incomplete, rendering the platform useless.
Just to be clear, I am a fan of both building-specific and tenant-specific apps and believe they can both bring a lot of value to all parties involved, but until the interoperability issues are ironed out, it's likely to cause a lot of frustration and confusion between landlords and tenants.
The above scenario is just one example of the compatibility issues that arise when many different technology solutions are released without an agreed upon industry standard. Unfortunately, I predict that these interoperability issues will only increase until they are resolved or until large-scale consolidation leads to one or two companies dominating the market (similar to IOS and Android in the mobile operating system industry).
The CRE industry is moving towards fully connected smart cities where the boundaries between live, work and play are becoming increasingly blurred. During this transition, interoperability issues will become more prominent and impactful. In the next article, we'll take a deeper look at the future of smart cities and explain why industry standards will be essential for a truly connected world.